Some of the greatest, growth-minded economists in history had names beginning with the letter S: Smith, Schumpeter and Say. Adam Smith taught us the virtues of free markets and free trade. Joseph Schumpeter placed entrepreneurship and technological innovation at the center of economic growth. And Jean-Baptiste Say understood in 1803 that we produce in order to consume.

Say was also the first to wear that great S-term -- supply-sider. He argued correctly that production and consumption are forever tied together, but it is the supply of risk capital and the supply of production that truly lie at the heart of the economy.

Here's how the thinking goes: Business creates production, production creates jobs, and wages for jobs create income. And when producers take time off to become consumers, they use their incomes to spend on goods and services.

So, one could conclude, if the producers are producing at a good rate, there must be a lot right with the economy. Say would agree with this statement in 1803. And we should agree with it today.

The Federal Reserve's May report on industrial production shows that production in America has increased for the fifth straight month. This statistic alone should put an end to any thoughts that the economy is double-dipping into another recession. But there's more. Through May this year, the index of industrial production increased at a 4.6 percent annual rate. A year ago, production was declining at a 5.8 percent annual rate. The upswing in production informs the upturn in the economy.

Down through the years, the industrial-production index has proven to be the most valuable coincident indicator of the economy. Back in late 1982, the first monthly gain of the index signaled the end of the nightmarish inflationary recession inherited by Ronald Reagan. Through the Johnson, Nixon, Ford and Carter administrations, the Keynesian mistakes of taxing, spending, inflating and regulating piled up. But Reagan arrived in 1980, growth-guns blazing.

Reagan promoted a sound dollar to conquer inflation and lowered tax-rates to spur production and consumption. The Gipper's tax-cut plan became fully effective in early 1983, and the economy took off. The first signal of that growth? The Fed's index of industrial production, which rose in December 1982 after failing to grow for four years. The index increased for nearly the next two decades.

The stock market malaise from corporate corruption, accounting fraud and fears of an imminent terrorist attack on the United States remains a big problem today. But as long as industrial production is rising, workers will have more jobs, consumers will have more income, retailers and department stores will benefit from higher sales, and the economy will continue to recover.

Expanding production also generates more income for the businesses that are producing the goods and services that will ultimately be consumed. Though few commentators seem to notice, economic profits in the national income accounts that we call GDP have increased 19 percent over the past two quarters. The current stock market funk cannot last if production and profits are on the rise.

Inside the production index, technology is the fastest-growing sector. But it seems we've forgotten our Schumpeter. Technology remains the least popular stock-market area today, although the output of new computers, communications equipment and semi-conductors have increased for six consecutive months. For the three months ending in May, tech production has registered a 15.5 percent annual gain.

Jean-Baptiste Say would be proud. He would laugh at demand-side economists who keep telling us the consumer is slumping. He would argue that production is the heart of the economy, not consumption. He would reason that if it is profitable to produce, after tax, then gains in the supply of production will soon lead to increases in the volume of consumption.

Of course, government can get in the way of the free market, which is where -- Adam Smith taught us -- growth begins. The Bush administration's tariff on steel, for example, is raising the cost and blunting the production of this valuable commodity. It is the president's worst mistake.

Fortunately, the tax cost of most production in the United States has been reduced by Federal laws to lower tax rates on individuals and businesses. In addition, the Fed is feeding more cash into the economic pipeline, removing the deflationary constraint on production.

On the world stage, the president is readying plans to transform the evil government of Iraq, a move that will ensure greater domestic security. Consequently, American businesses will remain open for production, and individual producers will get home to their families safely in the evening. Smith, Schumpeter and Say would all approve.

I think Larry Kudlow read Alice in Wonderland one too many times. How about a dose of reality Larry. I think I'll sit the beast rally out.

Rev. 13 15 And it was given to it to give breath to the image of the beast, that the image of the beast should also speak, and should cause that as many as should not do homage to the image of the beast should be killed. 16 And it causes all, the small and the great, and the rich and the poor, and the free and the bondmen, that they should give them a mark upon their right hand or upon their forehead; 17 and that no one should be able to buy or sell save he that had the mark, the name of the beast, or the number of its name. 18 Here is wisdom. He that has understanding let him count the number of the beast: for it is a man's number; and its number [is] six hundred [and] sixty-six.

Where is our productivity going? American workers are somewhere around 10 to 12 times more productive than 100 years ago, depending on what statistics you adhere to. Yet we now have 2 income households meaning we are actually working more. Again.. where did our productivity go? We have a few more creature comforts than 100 years ago.. true, but shouldn't we be able to live as well as people did 100 years ago while working 10% as much? Somebody set me straight here.

I don't use the "F" word (fiat) as it's been used too much by the lunatic fringe and I don't think I come across as delighting in the fall of many who were brainwashed by talking heads.

When I get a call from someone who's anguishing over losses or thinking of buying something that is in my opinion overvalued I simply ask them what's the p/e? And calmly explain that 10 times earnings is historically viewed as fairly valued. And then I tell them "If you simply MUST own it why don't you wait until it goes on sale at bla bla bla (whatever the "on sale" price would be). And then I have them look at the dollar. And then I explain that.

Become the New New Spoosman and seek to educate those who have a brain to ask.

You're in a position to help quite a few people. Quite a few people who've been screwed by the powers that be and who would be grateful for your assistance.

Larry Kudlow is the most accurate economist in the world. His predictions generally come true. The issue is time. He makes his predictions based on "all things being equal." Sometimes subsequent events delay his predictions. I expect certain events will arise that delay a full-blown recovery like Larry envisions, but a sound long-term investment plan would be over-weighted in tech (funds).

calmly explain that 10 times earnings is historically viewed as fairly valued.

That's a great point, d4now. However, the p/e ratio, by itself, excludes the most important factor in stock valuation - earnings growth %.

When I value a stock, the first thing I look at is p/e ratio. Next, I look to see, based on earnings growth % over the past 5 years and expected next 5 years, how long it will take for the "e" to equal the "p." The sooner the better (because of less risk).

For example: ABC trades at $10/share; the p/e ratio is 20/1; the earnings growth is 50%; the stock earnings equal a 1/1 p/e ratio in year 6; and thus the present fair market value of the stock is around $47 (taking the earnings growth over 30 years and discounting it by an estimated 30-year note rate of 5.5% (currently it's actually 5.38%)). I'd buy that stock at $10 (in fact, I'd buy longer term call options on it).

Here's how the thinking goes: Business creates production, production creates jobs, and wages for jobs create income. And when producers take time off to become consumers, they use their incomes to spend on goods and services.

Yea, but what happens when all "the producers" are in say China.

I just purchased a cast Iron Kholer tub ("The bold look of Kholer") once manufactured in Kholer Wisconsin by "productive Americans" yet ,...it was proudly labeled: Made In China.

The Federal Reserve's May report on industrial production shows that production in America has increased for the fifth straight month.

Tell that to the out of work productive Americans who used to make tubs etc. for that great American company Kholer.

OH, BTW, I didn't notice any reduction in the price of the tub due to the decrease in labor and compliance costs either.

Please look at the dollar index and juxtapost that with what you know (good opinion and fine thinking, imo).

It, the dollar decline, seems paramount to me. While a decline in the dollar doesn't have to mean no growth it will probably increase the rate at which foreign investors leave this market. And that is what matters right now and months from now.

Please look at the dollar index and juxtapost that with what you know.

You just made the best point on this thread, d4now. Everything I wrote depends in large measure on a strong Dollar. In the past 2 months the Dollar has weakened substantially. Falsely. The Dollar was slightly overvalued based on current economics (largely undervalued based on economic growth similar to that about which I wrote earlier). Currently, the Dollar is grossly undervalued globally (except places like Argentina).

Why? Just as you wrote, foreign investors are repatriating Euros, Yens, Dogsh*ts, whatever, because they feel that the U.S. is a great Terroristic target. Whatever. Anyway, the most reliable intel is that Al Queda sent it's idiot bombers back to the places from which they came to carry out bombings. In other words, Europe! Europe is now the prime terroristic target. As soon as the idiot bombers take out Big Ben, a cafe on the C.E. in Paris or Europa Centre in Berlin, Euro's will gush to $$$$!

Why? The U.S. has been the prime "flight to quality" location in world histroy. Any recent proof? Yup! Just today, the news was a larger U.S. trade deficit. A trade Def. is accounted for by an influx of foreign currency. In other words, we have a short-term tug-a-war bewteen currencies, but long-term fundamentals in favor of a strengthening $. The U.S. will have a great stock market if it wins it's war on terror. You heard it here first: The U.S. will win the war on terror if it's in Bagdad by November 1, 2002. But that is another story ....

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